Hukou views: Policy and property prices

In late July the State Council released its latest plans for reforming the hukou (housing registration) system. Under the plan, rural and urban hukou status will be merged into a single residency category that is applicable to all, though a local-migrant distinction remains. Meanwhile, education, healthcare, employment, social security, housing and land systems will, under certain conditions, become available to long-term, non-native city residents, as well as new arrivals that have obtained a local hukou. The State Council also intends to move 100 million people from the countryside into cities by 2020 to give the urbanization process an added push, especially in lower-tier cities, and the implications of all this for property markets could be significant. In a special feature for our cover story this month, China Economic Review sought out the views of five experts on how the latest reforms could affect residential and commercial property across China.

Regina Yang, Head of China Research, Knight Frank

“At the current stage, there is only a general guideline for hukou reform, and no detailed polices were announced by any local governments,” Yang said. “We don’t see any signs of price movements on the [property] market caused by the hukou reform [in the immediate future]. The latest hukou reform says that the government will remove the limits on hukou registration in townships and small cities, easing restrictions in medium-sized cities, and control the population size in big cities, which means the population will be mainly imported to small and medium-size cities, including tier four cities, and home price in these cities may increase in a long run.” However, in the short run, “we don’t think the prices in those regions will be boosted by the reform significantly.” Still, with much of the population settled in small and medium-size cities, the demand for commercial property in these cities will increase, and developers will adjust their strategies to accommodate this change, she said. The oversupply issue of commercial properties across China, in particular in tier three and four cities, might be thus solved. Yang said that in large and mega-cities migrants prefer to rent homes when they initially arrive due to high home prices. “In medium-sized and small cities, migrants will be more likely choose to buy homes, as the prices there are not as high.”

Michael Kilbaner, Head of Research for Greater China, JLL

Kilbaner suggested there will be “no significant commercial real estate impact at this point” as the government continues its tight migration controls on tier-one and tier-two cities. “I think one of the concerns would be just a huge physical inflow of people that those cities might not be able to handle,” he said. Even though the main targets of the hukou reforms are China’s smaller cities, JLL doesn’t foresee a drastic impact in property prices: “The government is able to talk about easing hukous in lower-tier cities because some of those cities are actually seeing population decreases. There’s not really that much commercial development in those lower-tier cities.” And while the government has pledged to move 100 million new rural residents to cities by 2020, Kilbaner was curious, “how much of that [100 million] is already physically in those cities?” What remains for these migrants is being given the opportunity to access social services in the places to which they’ve already moved: “I think that probably the majority of those ‘100 million’ people already live [in cities], they just can’t send their kids to school or can’t access medical care or the social services in those cities.” While the recent hukou reforms are a critical step for China as a country, Kilbaner said that “at this point there aren’t any critical implications for commercial real estate. But that is not to take away from the importance of these reforms for the country as a whole. To some extent it’s a little bit of a wait and see issue.”

Eddie Heng, Head of CBRE Consulting, China

China’s State Council announcement to promote urbanization by easing eligibility controls for urban residency permits has wide implications and in particular has some important impacts on the real estate market. The policy will lower entry barriers for smaller cities with populations of less than one million, but will maintain barriers in the large and super-large cities, causing stronger demand for real estate assets in the longer term in lower-tier cities. However, first and second-tier cities will remain the preferred destinations, with the demand for their residential and commercial real estate remaining strong. “We expect that regional clusters will emerge as a magnet for investment and migration, for example in cities such as Wuhan and Changsha. First-tier cities will continue to grow given their attractive underlying economics. However, to handle this, first-tier cities will need much better urban and infrastructure planning,” Heng said. “Both Beijing and Shanghai currently have a population of over 20 million and are already facing challenges. Better planning could enable mega cities to emerge in China that still offer good quality of life to residents.” As for potential short-term construction excesses in lower-tier cities, “recent history shows that, rather than rely on fundamental demand, local governments tend to support investment in urban and real estate development to drive local GDP growth. Given that shifting both industrial bases and large resident populations is a gradual process, investors should be mindful of signs of excessive construction in lower tier cities in the near term.”

Hao Zhou, China Economist, ANZ Bank

Looking at current urbanization plans, Zhou said ANZ forecasts that any significant property price impacts on the real estate market that result from policy reforms will happen in the longer term. “China will not push rural farmers to become urban residents at a very rapid pace. They will make it a gradual process to nurture this kind of new system.” In the longer term, these reforms could have relatively positive impacts on residential, commercial and industrial property: “Demand for residential properties will be there, and secondly, consumption will be picking up.” The removal of property restrictions varies across different cities, meaning there won’t be a single, homogenous effect in terms of construction across the country, Zhou said. “But the most important thing is that the supply and demand conditions in the different cities have been relatively imbalanced, especially in the third- and fourth- tier cities that have seen a lot of supply, but where demand is not that solid.” In the short term, government reforms will only provide a temporary boost for property prices across China, especially for the lower-tier cities where the reforms are mainly directed. Following the latest changes, Zhou said, China’s real estate environment will be dependent on overarching factors such as the broader economic environment and the levels of property supply and demand. Currently, property supplies are still quite high in comparison to property demand, so despite a planned loosening of some hukou restrictions, “a softness in property prices in all city tiers in China will likely persist for a while.”

Lu Ting, Chief China Economist, Bank of America Merrill Lynch
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“We estimate that there are about 27 million empty apartments in China, partly the result of the poor urbanization of migrant workers that meant they did not buy homes in the cities they worked in,” Lu said. For Lu and his team, reforming the hukou system to encourage greater migration to cities would be positive for the property market and therefore prices, as it would reverse what they see as the misallocation of real estate in China. “We have argued that China’s housing supply is misallocated, between urban and rural, developed and less developed regions, and big and small cities.” he said. “The effort to urbanize hundreds of millions of rural migrant workers has been hampered by the hukou system, which determines an individual’s ability to access public resources based on region, and by an unfair land ownership system.” Lu said that the hukou reform mentioned in the new State Council statement could help to reallocate housing strategically. Building homes where they are needed could offer support to the property market, and hukou reform could enable this by giving rural residents the incentives to move to where they work and not be forced to buy homes where they are from, which has skewed construction. This view suggests that new urbanization, driven by reforms to hukou and land ownership, will change the housing landscape. In the past, people bought homes where they were from; in the future, people will buy homes where they work, meaning that people will actually buy more of the houses that are built and reduce wasteful construction that hurts developers and local governments. “There will be ghost towns as people move to cities with jobs, and more small developers will likely go bust,” Lu and his team wrote in a June report, “but we see little chance of a systematic crisis.”

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